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UNITED MAGAZINE CO. v. MURDOCH MAGAZINES DIST.

May 31, 2001

UNITED MAGAZINE COMPANY, THE STOLL COMPANIES, MICHIANA NEWS SERVICE, INC., GEO. R. KLEIN NEWS CO., CENTRAL NEWS COMPANY, AND THE SCHERER COMPANIES, PLAINTIFFS,
v.
MURDOCH MAGAZINES DISTRIBUTION, INC., TV GUIDE DISTRIBUTION, INC., CURTIS CIRCULATION COMPANY, COMAG MARKETING GROUP, LLC, HEARST DISTRIBUTION GROUP, INC., KABLE NEWS COMPANY, INC., TIME DISTRIBUTION SERVICES, INC., WARNER PUBLISHER SERVICES, INC., AND CHAS. LEVY CIRCULATING CO., DEFENDANTS.



The opinion of the court was delivered by: Allen G. Schwartz, United States District Judge:

OPINION AND ORDER

Plaintiffs, related companies in the magazine and book wholesale business, allege that defendants, a wholesaler and various magazine and book distributors, have violated antitrust laws, breached certain contracts, and committed certain torts. The wholesaler, defendant Chas. Levy Circulating Co. ("Levy"), and the distributor defendants (collectively the "Distributors") each move, pursuant to Rule 12(b)(6), to dismiss the claims against them respectively in the Amended Complaint. For the reasons set forth below, defendants' motions are granted.

I. THE PARTIES

Plaintiff United Magazine Company ("Unimag") is an Ohio corporation with its principal place of business in Ohio. (Am. Compl. ¶ 6.) Unimag directly or indirectly owns of the stock of each of the other plaintiffs. (Id.) Plaintiff The Stoll Companies ("Stoll") is an Ohio corporation with its principal place of business in Ohio. (Id. ¶ 9.) Plaintiff Michiana News Service, Inc. ("Michiana") is a Michigan corporation with its principal place of business in Ohio. (Id. ¶ 11.) Plaintiff Geo. R. Klein News Co. ("Klein") is an Ohio corporation with its principal place of business in Ohio. (Id. ¶ 13.) Plaintiff Central News Company ("Central") is an Ohio corporation with its principal place of business in Ohio. (Id. ¶ 15.) Plaintiff The Scherer Companies ("Scherer") is a Delaware corporation with its principal place of business in Ohio. (Id. ¶ 19.)

Defendant Murdoch Magazines Distribution, Inc. and defendant TV Guide Distribution, Inc. (together "Murdoch") are Delaware corporations with their principal places of business in New York. (Id. ¶¶ 24-25.) Defendant Curtis Circulation Company ("Curtis") is a Delaware corporation with its principal place of business in New Jersey. (Id. ¶ 26.) Defendant Hearst Distribution, Inc. and defendant Comag Marketing Group, LLC (together "Hearst") are Delaware corporations with their principal places of business in New York. (Id. ¶¶ 27-28.) Defendant Kable News Company, Inc. ("Kable") is an Illinois corporation with its principal place of business in New York. (Id. ¶ 29.) Defendant Time Distribution Services, Inc. ("Time") is a Delaware corporation with its principal place of business in New York. (Id. ¶ 30.) Defendant Warner Publisher Services, Inc. ("Warner") is a New York corporation with its principal place of business in New York. (Id. ¶ 31.) (Time and Warner will hereinafter together be referred to as "Time Warner."*fn1) Defendant Levy is an Illinois partnership with its principal place of business in Illinois. (Id. ¶ 34.)

II. BACKGROUND

The facts set forth below are taken from the Amended Complaint. All of the parties herein are involved in the magazine and book distribution industry, the structure of which forms the factual background of this action. Each magazine or book (together "publication") is published by a specific publisher. (E.g. Time-Warner, Inc. publishes Time.) (Am. Compl. ¶ 38.I.) Each publisher then sells specific publication titles to a particular distributor. Commonly, publication titles are available from only one distributor. (E.g. TV Guide is only available from Murdoch.) (Am. Compl. ¶¶ 38.G, 46.) Distributors then resell the publications to wholesalers at a discount off of the cover price. (Id. ¶ 52.) Distributors determine the wholesalers to which titles will be sold, and in what quantity. (Id. ¶ 46.) Wholesalers, in turn, resell the publications to retailers at a smaller discount off the cover price than the wholesalers receive from the distributors. (Id. ¶ 52.) Wholesalers are responsible, at their own expense, for allocating the publications among retailers, physically distributing the publications to retail locations, and arranging the publications in display racks. (Id. ¶¶ 47-48.) Retailers then sell the publications to consumers at the cover price. (Id. ¶ 52.)

Any publications unsold at the end of their respective shelf lives are removed from retail locations by the wholesalers, at the wholesalers' expense. The wholesalers are then responsible for disposing of the unsold publications and certifying such disposal to the distributors. Certification may entail removing the cover of each unsold publication and shipping the covers back to the particular distributor, or scanning the UPC codes on the unsold publications and sending the distributor an affidavit stating that the wholesaler disposed of the particular publications properly. (Id. ¶¶ 48-49.) Unsold publications also generate credits back along the chain of sale. That is, retailers receive credits from wholesalers for each unsold publication; wholesalers receive credits from distributors; and distributors receive credits from publishers. (Id. ¶¶ 50, 52.) Under this system, distributors have a financial incentive to distribute as many copies of the publications as possible because they receive full credit for unsold publications that they purchased and are not responsible for the costs of physical distribution. (Id. ¶ 53.)

Historically, each wholesaler was granted one or more exclusive geographic territories in which it alone sold publications to retailers. Any retailer in a given area could purchase publications only from the single wholesaler with rights to that area. (Id. ¶¶ 44, 56-60.) Under this system, wholesalers could operate profitably because any losses incurred supplying smaller, less-profitable retailers were compensated for by profits made on larger, more-profitable retailers. Over the last fifty years, the number of both distributors and wholesalers has decreased, as distributors purchased other distributors and wholesalers purchased other wholesalers. (Id. ¶ 45.) For example, during this period Unimag acquired Stoll, Michiana, Klein, and Central. (Id. ¶¶ 9, 11, 13, 15.) Beginning in 1995, one or more of the Distributors began permitting some wholesalers to sell magazines and books to certain large retailers without regard for exclusive geographic territories. (Id. ¶ 62.) Under the new system, wholesalers were permitted to bid for the right to sell to a given large retailer in multiple territories. (Id. ¶¶ 63-64.) This change was apparently driven by the large retailers, who preferred to purchase all of their publications from one wholesaler, rather than having to make purchases from a different wholesaler in each geographic area. (Id. ¶ 63.)

From 1938 through late 1995, Stoll had exclusive territories in northern Ohio, southern Michigan, and eastern Indiana. (Id. ¶ 103.) From 1971 through late 1995, Michiana had exclusive territories in southwestern Michigan, Indiana, and northwestern Ohio. (Id. ¶ 104.) From 1958 through late 1995, Klein had exclusive territories in northern and northeastern Ohio. (Id. ¶ 105.) From 1959 through late 1995, Central had exclusive territories in northern Ohio, West Virginia, and Pennsylvania. (Id. ¶ 106.) Service News Company d/b/a Yankee News Company, had exclusive territories in Connecticut and New York from 1958 until its merger into Unimag in 1998. (Id. ¶¶ 21, 107.) From 1988 through late 1995, Unimag had exclusive territories in Connecticut, New York, North Carolina, South Carolina, and Pennsylvania. (Id. ¶ 108.) Scherer did not itself operate as a wholesaler of books and magazines. Instead, Scherer provided management services and computer hardware, software, and technical support to the other plaintiffs. (Am. Compl. ¶ 20.) As of late 1995, Levy had exclusive territories in Illinois, Indiana, Michigan, Pennsylvania, and Wisconsin. (Id. ¶ 112.)

Sometime between 1995 and 1999, defendant Levy began selling to one or more large retailers in one or more of the plaintiffs' previously exclusive territories. (Id. ¶ 76.) The Distributors enabled Levy to do this by providing Levy with extra copies of magazines and books, as well as with various discounts. These discounts were not provided to plaintiffs. (Id. ¶¶ 63, 67, 74.) As a result, plaintiffs were left with only smaller, less-profitable retailers, and so had difficulty maintaining sufficient revenues to continue to operate. (Id. ¶¶ 73, 93.) In late 1998, Levy negotiated to acquire the assets of plaintiffs. (Id. ¶ 115.) These negotiations culminated in an executed asset purchase agreement dated March 18, 1999 (the "Purchase Agreement"). Plaintiffs and Levy never closed on the asset purchase transaction, however. Plaintiffs allege that they were "forced" to cease doing business in September 1999. (Id. ¶ 93.) Plaintiffs filed this action on May 3, 2000. Murdoch moved to dismiss the complaint on July 20, 2000. In response, plaintiffs filed the Amended Complaint on August 31, 2000. All defendants then filed the instant motions to dismiss the Amended Complaint. The Court heard oral argument on the motions on May 1, 2001.

III. MOTION TO DISMISS STANDARD

A court may not dismiss a complaint pursuant to Rule 12 unless, even when the complaint is liberally construed, it appears beyond doubt that the plaintiff can prove no set of facts which would entitle it to relief. Jaghory v. New York State Dep't of Educ., 131 F.3d 326, 329 (2d Cir. 1997). On a motion to dismiss, a court must accept as true all of the facts alleged in the complaint. Id. A court must also must draw all reasonable inferences in the light most favorable to the plaintiff. Id. In antitrust cases, as in other types of cases, all that is required is a "short plain statement of a claim for relief which gives notice to the opposing party." Global Disc. Travel Servs. v. Trans World Airlines, 960 F. Supp. 701 (S.D.N.Y. 1997). "This does not mean that `conclusory allegations which merely recite the litany of antitrust . . . will suffice.'" Id. (quoting John's Insulation, Inc. v. Siska Constr, Co., 774 F. Supp. 156, 163 (S.D.N.Y. 1991)).

IV. PLAINTIFFS' ANTITRUST CLAIMS

Plaintiffs' Amended Complaint includes fifteen counts, some of which contain more than one cause of action. In this section, the Court addresses the three counts that implicate antitrust law, both federal and state. The remaining counts will be addressed in the following section.

A. Robinson-Patman Act (Count I)

Plaintiffs allege three separate causes of action under the Robinson-Patman Act, 15 U.S.C. § 13 et seq. First, that the Distributors violated section 2(a) of the Robinson-Patman Act, 15 U.S.C. § 13(a), by selling goods to Levy at a lower price than they charged plaintiffs. Second, that all of the defendants violated section 2(c) of the Robinson-Patman Act, 15 U.S.C. § 13(c). by the Distributors paying, and Levy receiving, discounts disguised as brokerage fees or discounts that constituted commercial bribes. Third, that Levy violated section 2(f) of the Robinson-Patman Act, 15 U.S.C. § 13(f), by receiving discriminatorily lower prices for goods. The Court will address each cause of action in turn.

1. Section 2(a)

Plaintiffs allege that the Distributors sold publications to Levy at a lower price than the Distributors sold publications to plaintiffs, thereby harming plaintiffs, in violation of section 2(a). (Am. Compl. ¶¶ 66-84.) The Distributors argue that plaintiffs have failed to adequately allege all of the elements of a section 2(a) claim. (Joint Mem. of Law of the National Distributor Defs. in Supp. of Their Mot. to Dismiss Pls.' Am. Compl. Pursuant to Fed.R.Civ.P. 12(b)(6) ("Distributors' Mem.") at 3-8.) The Court finds that plaintiffs have not adequately alleged two elements of their section 2(a) claim. Section 2(a) prohibits discriminatory pricing among competing buyers of the same goods. 15 U.S.C. § 13(a). To state a claim for secondary-line price discrimination under section 2(a),*fn2 a plaintiff must allege that: (i) the seller made sales in interstate commerce; (ii) the seller discriminated in price between two buyers; (iii) the product sold to both purchasers was the same grade and quality; and (iv) the price discrimination had an unlawful effect on competition. George Haug Co. v. Rolls Royce Motor Cars, Inc., 148 F.3d 136, 141 (2d Cir. 1998). In order to establish an unlawful effect on competition, a plaintiff must allege that it was actually competing with the favored purchaser at the time of the price discrimination. Id.; Best Brands Beverage, Inc. v. Falstaff Brewing Corp., 842 F.2d 578, 584-85 (2d Cir. 1987). An allegation of actual competition at the time of the price discrimination, and of a price discrimination that was substantial and sustained over time, will satisfy the fourth element of a section 2(a) claim. George Haug, 148 F.3d at 142-44.

The first two elements of the section 2(a) claim are adequately pled here. The Distributors do not dispute that plaintiffs have alleged the first element, the sale of goods or commodities in interstate commerce. The Distributors argue that plaintiffs have not pled the second element, price discrimination between favored and disfavored buyers, because the plaintiffs have not alleged competition between plaintiffs and Levy at the time when, and in the geographic markets where, any price discrimination occurred. (Distributors' Mem. at 5-6.) This argument addresses not the second element of a section 2(a) claim, but the fourth. All that is required for the second element is an allegation of discrimination by the seller between two buyers. George Haug, 148 F.3d at 136. Plaintiffs allege that Levy purchased publications from the Distributors at a unit price per publication lower than the unit price plaintiffs were forced to pay the Distributors. (Am. Compl. ¶ 67.) This allegation is sufficient to satisfy the second element.*fn3

The third element of plaintiffs' section 2(a) claim is a closer question. The Distributors argue that plaintiffs have not adequately alleged the third element because they have not pled that Levy and the plaintiffs purchased products of the same grade and quality. (Distributors' Mem. at 6-7.) Plaintiffs allege that they paid a higher price than did Levy "for the same Magazine or Book from the same seller." (Am. Compl. ¶ 67.) As defendants point out, however, this allegation is made problematic by plaintiffs' defined terms. "Magazines and Books" is defined as "the lines of mass-market magazine titles, newspapers, other periodicals and paperback book titles published by the Publishers and distributed by the [Distributors] to Wholesalers or directly to Major Retailers in the United States." (Am. Compl. ¶ 38.E.) of course, if certain periodicals were sold directly to retailers, and not to wholesalers, they may not form the basis of plaintiffs' Robinson-Patman claims. Also, the "Publishers" are alleged to publish only magazines; accordingly, "Magazines and Books" actually includes no books, newspapers, or "other periodicals" other than magazines. (Am. Compl. ¶ 38.1.) Further, plaintiffs argue in their memorandum that, contrary to what is alleged in the Amended Complaint, the products at issue are "the 38 supertitle Magazines." (Pls.' Mem. in Opp. to the Nation Distributor Defs.' Mot to Dismiss Pls.' Am. Compl. Pursuant to Fed.R.Civ.P. 12(b)(6) ("Pls.' Distributor Mem.") at 8.) "Supertitle" is an undefined term that apparently refers to the most popular magazines. "Magazines and Books" by its definition, however, does not refer to certain supertitles. For example, Shape is allegedly a "supertitle." (Am. Compl. ¶ 38.G.4.) However, Shape is not within the category of "Magazines and Books" because it is not published by one of the "Publishers." (Am. Compl. ¶ 38.I.) Thus, Kable's sale of Shape is not alleged to be a basis for the section 2(a) claim. Plaintiffs do not clearly allege that Kable distributes magazines and books other than Shape, or that Levy and any particular plaintiff was charged different prices for whatever magazines Kable does distribute. Even under notice pleading, plaintiffs' conclusory allegation, combined with their unclear and inconsistent definitions of terms, does not afford Kable proper notice of how it has allegedly violated the Robinson-Patman Act. Similarly. plaintiffs' conclusory allegations and problematic definitions fail to give adequate notice to the other Distributors. That is not to say that plaintiffs must allege the exact price paid by each of them and by Levy for each specific title, or otherwise plead all of their evidence. However, absent clearer notice than they have provided in the Amended Complaint, plaintiffs have failed to adequately allege the third element of their section 2(a) claim.

Plaintiffs also do not adequately allege the fourth element of their claim. As noted above, the Distributors argue that there is no sufficient allegation of actual competition between plaintiffs and Levy at the time when, and in the place where, any price discrimination occurred. The Distributors also argue that, even if there was competition and price discrimination, any such price discrimination was not sustained over a long enough period of time to establish harm to competition. (Distributors' Mem. at 5-6, 8.) Plaintiffs initially allege that. "[s]tarting in 1995, some of the [Distributors] permitted some Wholesalers to supply Magazines and Books to retail locations of Major Retailers without regard to the exclusive geographic areas." (Am. Compl. ¶ 62.) This allegation is insufficient to meet the requirement that there have been competition between any of the plaintiffs and Levy. Plaintiffs later allege that during the period from May 1996 to May 2000, "plaintiffs have been in competition with Levy and other Wholesalers... for sales of Magazines and Books to some of plaintiffs' Major Retailer customers and prospective customers in the 11-state territory serviced by plaintiffs. . . ." (Am. Compl. ¶ 76.) While an improvement over the first allegation, this allegation is still insufficient. First, it is not clear from this allegation if any competition was with Levy or a non-party wholesaler. Second, as noted above, plaintiffs may not treat six separate entities as if they were one. Each of the five wholesaler plaintiffs had a distinct territory or territories. See supra p. 5. It is unclear from the Amended Complaint as to which plaintiffs faced competition from which of the wholesalers in which territories for sales of the same commodities. Plaintiffs may not state a claim by glossing over these factual requisites with a conclusory allegation of competition. Moreover, there is no clear link between the timing and location of any competition and the timing and location of the alleged price discrimination. To state a claim, each plaintiff must allege that there was price discrimination between it and Levy during the time, and in the place, where that plaintiff and Levy competed for the sale of the same goods. Because plaintiffs have not done this, they have not adequately alleged a claim under section 2(a). Accordingly, the Court dismisses this cause of action.

2. Section 2(c)

Plaintiffs allege that the defendants violated section 2(c) of the Robinson-Patman Act by arranging for Levy to receive various payments and discounts that amounted to sham brokerage fees and commercial bribes. (Am. Compl. ¶¶ 66-84.) The defendants argue that plaintiffs have not sufficiently alleged sham brokerage fees or commercial bribery. (Distributors' Mem. at 4 n.3; Defendant Chas. Levy Circulating Co.'s Mem. of Law in Supp. of its Mot. to Dismiss Pls.' Am. Compl. Pursuant to Rule 12(b)(6) ("Levy's Mem.") at 7-9; Joint Reply Mem. of Law of the National Distributor Defs. in Further Support of Their Mot. to Dismiss Pls.' Am. Compl. Pursuant to Fed.R.Civ.P. 12(b)(6) at 3-4; Def. Chas. Levy Circulating Co.'s Reply Mem. of Law in Supp. of its Mot. to Dismiss Pls.' Am. Compl. Pursuant to Rule 12(b)(6) at 4-5.) The Court finds that plaintiffs have not adequately alleged all of the elements of a claim under section 2(c). Section 2(c) prohibits sham brokerage fees, that is, price concessions disguised as payments to alleged brokers who do no brokerage work but simply turn the payments over to buyers. 15 U.S.C. § 13(c); Federal Trade Comm'n v. Henry Broch & Co., 363 U.S. 166, 169 (1960). Some courts have also construed section 2(c) to prohibit commercial bribery, although this is not a settled question in the Second Circuit. Compare, e.g., Philip Morris, Inc. v. Grinnell Lithographic Co., 67 F. Supp.2d 126 (E.D.N.Y. 1999) (prohibits bribery) with Intimate Bookshop, Inc. v. Barnes and Noble, Inc., 88 F. Supp.2d 133 (S.D.N Y 2000) (applies only to brokerage fees).

Plaintiffs' claim of a violation of section 2(c) apparently rests entirely upon the allegations in one paragraph of the Amended Complaint, which alleges:

Upon information and belief, the [Distributors] offered and/or Levy and Hudson News solicited, induced and knowingly received on its [sic] Magazine and Book purchases from the [Distributors] and from the Publishers the following secret Discounts, Rebates and Deductions knowing that they were not being offered or made available to plaintiffs and that such Discounts, Rebates and Deductions were in violation of the Robinson-Patman Act:
 
(r) upon information and belief. Murdoch and the other [Distributors] arranged for additional discounts and payments to or for the benefit of Levy:
(1) from Publishers of supertitles being distributed by the respective [Distributors] and other Publishers, given directly to Levy
(2) from said Publishers and the [Distributors], given indirectly to Levy through payments to Levy Trucking Company, Levy Book Company or other Levy affiliates; and
(3) from brokers or other third persons as brokerage fees or similar payments;

in violation of paragraph 2(c) of the Robinson-Patman Act.

(Am. Compl. ¶ 74(r).) Subparagraph (3) is conclusory, devoid of facts, and fails to state a claim under section 2(c) of the Robinson-Patman Act. Subparagraphs (1) and (2) are insufficient to allege sham brokerage fees. "The fact that a direct payment or indirect discount passes from one party to another party does not compel the conclusion that the payment or discount violates Section 2(c)." Intimate Bookshop, 88 F. Supp. 2d at 140. Yet subparagraphs (1) and (2) allege nothing more. "In order to make out a prima facie Section 2(c) claim, a plaintiff must specifically plead that the payment or discount is in lieu of a brokerage [fee], which the Federal Trade Commission and courts have defined as a reduced or eliminated brokerage." Id. Plaintiffs do not make this required pleading. The only mention of brokerage is the conclusory statement in subparagraph (3). It is not possible to conclude from the Amended Complaint that the payments described were not genuine brokerage fees "for services rendered in connection with the sale or purchase of goods," as the Robinson-Patman Act permits. 15 U.S.C. § 13(c).

As for commercial bribery, assuming arguendo that it is prohibited under section 2(c), plaintiffs have failed to state a claim. To the extent that section 2(c) prohibits bribery, it prohibits "cases of commercial bribery involving a breach of a fiduciary duty by the buyer's agent." Grinnell, 67 F. Supp. 2d at 131. For example, the plaintiff in Grinnell alleged that the defendants bribed plaintiff's purchasing manager to buy lithographic services from defendants rather than from defendants' less expensive competitors. Id. at 128. Plaintiffs here allege nothing of the sort; they allege only payments to Levy or its affiliates. The allegation that a discount or payment passed from one business to another does not implicate bribery involving a breach of fiduciary duty. Thus, even if it is possible to state a claim for commercial bribery under section 2(c), plaintiffs have not done so. Accordingly, plaintiffs' causes of action under section 2(c) are dismissed.

3. Section 2(f)

Plaintiffs allege that Levy violated section 2(f) by knowingly receiving discriminatory prices in violation of other sections of the Robinson-Patman Act. Section 2(f) provides that, "[i]t shall be unlawful for any person engaged in commerce, in the course of such commerce, knowingly to induce or receive a discrimination in price which is prohibited by this section." 15 U.S.C. ยง 13(f). Because the Court has already dismissed plaintiffs' other causes of action under the Robinson-Patman Act, there remains ...


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